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Newell Gains 24% in 3 Months on Solid Transformation Efforts

Zacks Equity Research

Newell Brands Inc. NWL is significantly benefiting from the smooth execution of its Transformation Plan through market share gains, point of sale growth, e-commerce improvement and cost savings. Moreover, Newell has been offloading its non-core businesses, which are likely to boost its operational performance and enhance shareholder value amid a tough retail backdrop.

Benefits from the transformational efforts have cushioned this Zacks Rank #3 (Hold) stock, which has gained 23.6% in the past three months. However, the industry declined 21.5% in the same time frame. Moreover, a VGM Score of A and an expected long-term earnings growth rate of 6% highlights the stock’s potential.

Let’s Delve Deeper

The key aspects of the Transformation Plan are restructuring the company into a global consumer product entity, valued at more than $9 billion. The company plans to offload non-core businesses that account for nearly 35% of Newell’s sales; utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchase as well as retain its investment grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.

Moreover, the execution of the plan will simplify Newell’s operations including reduction in the company’s manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% as well as decrease 30 ERP systems to two by the end of 2019. Management will also focus on right-sizing the cost structure for anticipated smaller net sales, removing stranded corporate expenses and recovering the synergies lost through the divestitures.

We note that Newell makes prudent investments in areas with higher-growth potential and divests underperforming and non-core assets. The company plans to pursue divestitures of the U.S. Playing Cards, Mapa/Spontex and Quickie businesses, which are classified as assets held for sale. It expects to complete divestitures of these businesses by the end of 2019, generating $675-$775 million of after-tax proceeds. Notably, this will mark the completion of the company’s Accelerated Transformation Plan.

Proceeds from the divestitures will be used to reduce debt as part of its efforts to strengthen balance sheet and maintain investment grade rating. Meanwhile, the company remains on track to improve leverage by allocating divestiture proceeds to pay down debt and make share repurchases. In second-quarter 2019, Newell lowered its gross debt by $517 million and net debt by $777 million. Management now estimates to achieve a gross debt to an EBITDA leverage ratio of less than 4 by the end of 2019 and roughly 3.5 by the end of 2020. Apparently, this highlights the company’s focus on deleveraging the balance sheet to drive shareholder value.

Given the Rubbermaid Commercial Products business’ solid prospects, management announced plans to retain this business. Robust cash flow generation along with higher sales and margins is likely to aid this business. Newell expects this decision be accretive to operating margins, normalized earnings per share and operating cash flow in 2020 and beyond. Reflecting the benefits from the inclusion of this business, which will be effective from third-quarter 2019, the company raised net sales and operating cash flow guidance for the current year.

For 2019, net sales are now projected to be $9.1-$9.3 billion compared with the previously mentioned $8.2-$8.4 billion. Operating cash flow is projected to be $600-$800 million compared with $300-$500 million guided earlier.

Despite the robust Transformation Plan, Newell grapples with soft core sales, which are expected to decline in a low-single digit in 2019. Lower core sales along with unfavorable currency translations have been weighing on the company’s top line.

Nevertheless, we expect Newell’s strategic efforts including the Transformation Plan to drive the top line in the long term.

3 Better-Ranked Stocks in the Consumer Staples Space

MGP Ingredients, Inc. MGPI delivered average positive earnings surprise of 6.9% in the last four quarters. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Medifast, Inc. MED has delivered an average trailing four-quarter positive earnings surprise of 5.6%, and a Zacks Rank of 2.

Conagra Brands, Inc. CAG, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 7%.

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